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Banking 7 min read

Open Banking Payments: What They Are and Why Merchants Should Care

Open banking payments let customers pay directly from their bank account — no card, no card network, no chargeback risk. For the right merchant, they're cheaper, faster to settle, and fundamentally more secure than traditional card payments. The question is whether they're right for your use case.

David Sampson · Founder, IceTree

Payment consultant specialising in PSP matching, card acquiring, and high-risk merchant solutions ·

How Open Banking Payments Work

Open banking is a regulatory framework that requires banks to share customer account data and accept payment instructions from authorised third-party providers — via secure APIs, with the customer's explicit consent.

A payment initiated via open banking works like this:

  • Customer selects "Pay by Bank" at your checkout
  • They're redirected (or shown a QR code) to authenticate with their own banking app
  • They approve the payment amount and recipient within their trusted banking environment
  • The payment is sent directly from their account to yours via Faster Payments (or SEPA in Europe)
  • You receive confirmation and can fulfil the order immediately

Critically, the customer's card details are never involved. There is no card network intermediary. The payment goes bank-to-bank, and the money arrives in your account — typically within seconds under UK Faster Payments.

The Commercial Case for Merchants

Lower processing costs

Card payments cost 1–2.5% of transaction value. Open banking payments typically cost 0.1–0.5% or a flat fee per transaction. For high-value transactions, the saving is material. A £1,000 order that costs £15–25 in card fees might cost £0.50–2.00 via open banking.

This is because open banking payments bypass the card network entirely — there's no interchange fee paid to the issuing bank and no scheme assessment fee paid to Visa or Mastercard. You pay the payment initiation provider's margin and the underlying bank transfer cost, which is close to zero.

No chargebacks

Open banking payments are push payments — the customer initiates and authorises the transfer from within their own banking app. There is no card network dispute mechanism. Customers cannot file a chargeback because there is no card issuer to go to.

For merchants in high-chargeback industries — subscriptions, gaming, digital goods, travel — this is significant. You still need to handle customer complaints and refund requests, but they go through your own process rather than an uncontrollable dispute mechanism that can cost you 2.5x the original transaction value.

Instant settlement

Faster Payments (UK) settles in seconds. Compare this to card payments, which typically settle T+1 or T+2 — and for new merchants, often T+3 or longer with rolling reserves. For businesses where cash flow is critical, or for high-value B2B transactions, instant availability of funds is meaningful.

Reduced fraud risk

Open banking payments require the customer to authenticate using their banking app biometrics or PIN — the same strong authentication they use for any banking transaction. It's significantly harder to commit payment fraud via open banking than via stolen card details used online.

This is particularly valuable for merchants who have historically suffered from card-not-present fraud, where stolen card data can be used with relatively low friction.

The cost saving in context

A merchant processing £500k/month in card payments at an average rate of 1.5% pays £7,500/month in processing fees. Shifting 30% of volume to open banking at 0.3% average cost reduces that by approximately £1,800/month — £21,600/year — without any change to the customer experience for the remaining 70%.

Where Open Banking Payments Work Best

Open banking isn't a replacement for cards in all contexts. It works best where:

  • High-value transactions. The percentage saving is most material when transaction values are large. B2B payments, insurance premiums, property deposits, and large e-commerce orders are ideal.
  • Regulated industries with chargeback exposure. Gaming, crypto, forex, and subscription businesses benefit most from removing the card network dispute mechanism entirely.
  • Businesses with strong customer relationships. Open banking requires the customer to authenticate via their banking app — they need to trust you enough to complete that step. Established brands with repeat customers convert better than cold acquisition flows.
  • B2B payments and invoice settlement. Open banking is gaining significant traction in B2B as a replacement for BACS or cheque — faster, with better remittance data, and immediately reconcilable.

Where Cards Still Win

Open banking has real limitations that matter in certain contexts:

  • Consumer checkout conversion. Cards are habitual. Most consumers are comfortable typing a card number; switching to a new authentication flow adds friction that can reduce conversion, particularly for new or infrequent customers.
  • International coverage. Open banking is well-established in the UK and EU, but coverage varies significantly in the Americas, APAC, and the Middle East. Card networks remain the universal global standard.
  • Refunds. Card refunds are seamless — a single API call reverses the charge. Open banking refunds require a separate outbound bank transfer, adding operational overhead.
  • Consumer protection expectations. Many consumers specifically choose to pay by credit card for Section 75 protection on purchases above £100. Offering only open banking removes this option and may deter some customers.

How to Add Open Banking to Your Checkout

The simplest approach is to work with a Payment Initiation Service Provider (PISP) that has pre-built integrations with UK and EU banks. Providers in this space include TrueLayer, Yapily, Token.io, and several all-in-one payment platforms that have added open banking as a payment method alongside cards.

The integration typically involves:

  • Adding a "Pay by Bank" option to your checkout alongside your existing payment methods
  • Connecting the PISP to your order management system for payment confirmation webhooks
  • Setting up a reconciliation flow for incoming Faster Payments references
  • Establishing an outbound payment process for refunds

Most providers offer a hosted payment page option that requires minimal technical integration — the PISP handles bank selection, authentication, and confirmation. A custom integration via API gives more control over the UX but requires more development time.

The recommended approach

Add open banking as an additional payment option rather than a replacement — let customers self-select based on their preference. Segment your data after 90 days to understand which customer types prefer it, what your conversion rate is, and what the actual cost saving looks like. Then optimise accordingly.

FAQ

Common questions answered.

Yes. Open banking is mandatory for banks across the UK (under the CMA Order and FCA rules) and the EU (under PSD2). In the UK, all nine major banks must provide open APIs for payment initiation and account access. Adoption varies by country — the UK, the Netherlands, and the Nordics have the most mature ecosystems. Expanding coverage globally is ongoing, with similar frameworks developing in Australia, Brazil (via Pix), and parts of Southeast Asia.

Open banking only works when the customer's bank participates in the relevant scheme. In the UK, coverage is near-universal for personal current accounts at major banks. Business accounts and smaller banks may have gaps. Payment providers typically present open banking as one checkout option alongside cards — if a customer's bank isn't supported, they fall back to card payment. Offering open banking as an additional method, not a replacement, is the standard approach.

This is the main operational limitation. Open banking payments are push payments — the customer sends money directly to you. Unlike card payments, there is no built-in reversal mechanism. Refunds must be issued as a separate bank transfer back to the customer. Some providers are building refund APIs into their platforms, but for now, if your business model involves frequent refunds, you need a reliable outbound payment process to handle them and factor in the operational overhead.

Yes. Payment Initiation Service Providers (PISPs) must be FCA-authorised or registered. Open banking infrastructure in the UK is overseen by the Open Banking Implementation Entity (OBIE) and the FCA. When you use an open banking payment provider, their regulatory status covers the payment initiation — you don't need a separate licence to offer open banking as a payment method on your checkout.

Card processing typically costs 1–2.5% of transaction value. Open banking payment costs vary by provider but are generally in the range of 0.1–0.5% or a flat fee of £0.10–0.30 per transaction. The saving is most pronounced for high-value transactions — a £500 payment that would cost £8–12 on cards might cost £0.30–1.00 via open banking. At meaningful volume, the saving justifies the integration investment relatively quickly.

Interested in open banking for your checkout?

We'll identify the right PISP for your transaction profile, estimate your actual cost saving, and connect you with the right partner — at no cost to you.

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